Currency substitution: Theory and evidence from Turkey

In the last thirty-five years, Turkey and many Latin American countries have experienced a phenomenon known as dollarization, in which residents hold a significant share of their assets or liabilities in terms of a foreign currency that is not legal tender. In the case of partial dollarization, the foreign currency starts to serve one or more of the domestic currency's three functions. In contrast, with full dollarization, the domestic currency is wholly abandoned, and a foreign currency replaces it in all transactions and legal payments. This study analyzes the partial dollarization experiences of two Latin American countries (Mexico and Argentina) and Turkey for the 1990 – 2019 period. The dollarization process in each country is discussed from a historical perspective by focussing on the inflation rates, exchange rates, and exchange rate regimes of these countries. Although Argentina had the highest inflation rate and US dollar exchange rate in the period analyzed, Turkey had the highest asset and liability dollarization ratio.